Consumer Bankruptcy Journal Fall 2016 - Page 36

A Franchisee Considering Bankruptcy

By Christine M . Kieta , Esq . The Law Office of Christine M . Kieta PC Chicago , Illinois
The Consumer “ Investing ” In A Franchise

Perhaps the easiest business to build that fulfills the “ American Dream ” is buying into a franchise . Some group of elite business people thought of an idea or product to sell to the world through the most advanced business model of their generation . This business model , known as the franchise , allows the franchisor to minimize its costs while still providing much needed expansion . Those costs are usually shifted onto the franchisee who gets to do business in the name of the franchisor . In exchange , the franchisee generally does not need any superior business talent or entrepreneurial skill . They need the initial financial investment to pay a franchisee fee if any , funds to open up a store , and people to staff that store . The franchisee then follows the franchisor ’ s business model . In a dull way the franchisee gets to be his own boss .

Frankly , a lot of consumers invest in franchises . They take on almost all the financial risk of a business expanding into a new territory . Endless are the stories of the money lost and the debt that haunts them from unexpired commercial leases , purchased inventory that they can ’ t sell , or withheld commissions under an indecipherable mathematical equation . A failed franchise is a financial nightmare . And the bargaining power behind the agreements is often uneven .
This American Dream of being you own boss when in a franchise relationship is severely altered by the franchise agreements and the laws that affect these relationships . Moreover , if the franchisee ’ s financial prospects change such that he has to contemplate bankruptcy ( whether or not it is triggered by the franchise ) he can lose his franchise and may not know that . Indeed , the bankruptcy attorney may not know this either . On the other hand , if contemplating bankruptcy is triggered by the franchise relationship a great analysis instead of bankruptcy is whether or not there is a cause of action available to the franchisee which would sooth the debt .
The Franchise Agreements And The Automatic Stay
Franchise agreements are normally complex and can be a compilation of several contracts . The franchisee may have entered one agreement with the actual franchisor itself . He may have entered other companion agreements with separate entities as a condition to getting the agreement with the franchisor . The agreements often have at least a choice of law clause or it ’ s bigger sister the forum selection clause making any litigation favorable to the franchisor . The franchisee may not even have direct contact with the franchisor and may have to go through a middleman for everything from inventory to getting paid for the product or service it sells .
These business relationships sound messy . But they are not . The obvious benefit is to establish a circuitous labyrinth preventing liability up the chain to the franchisor . If the franchisor or its middleman cancels any of the franchise agreements or refuses to renew then that can have devastating consequences to the franchisee financially .
A very obvious solution to cancellation or non-renewal is to file for bankruptcy to get the protection of the automatic stay . See 11 U . S . C . § 362 . But given the peculiar nature of franchise agreements other provisions of the Bankruptcy Code are triggered . “ It has become generally accepted that franchise agreements that have not terminated as of commencement of a case are executory contracts under the Bankruptcy Code .” In Re Steaks To Go , Inc ., 226 B . R . 35 , 37 ( E . D . Mo , 1998 ) ( internal citation omitted ). Under § 365 ( c ) the trustee cannot assume or assign an executory contract or unexpired lease whether or not the contract or lease restricts that if ( a ) applicable law excuses a party to the contract ( other than the debtor ) from accepting performance from or rendering performance to an entity other than the debtor , and ( b ) such party does not consent to the assumption or assignment .
36 CONSUMER BANKRUPTCY JOURNAL Fall 2016 National Association of Consumer Bankruptcy Attorneys
A Franchisee Considering Bankruptcy By Christine M. Kieta, Esq. The Law Office of Christine M. Kieta PC Chicago, Illinois all the financial risk of a business expanding into a new territory. Endless are the stories of the money lost and the debt that haunts them from unexpired commercial leases, purchased inventory that they can’t sell, or withheld commissions under an indecipherable mathematical equation. A failed franchise is a financial nightmare. And the bargaining power behind the agreements is often uneven. The Consumer “Investing” In A Franchise P erhaps the easiest business to build that fulfills the “American Dream” is buying into a franchise. Some group of elite business people thought of an idea or product to sell to the world through the most advanced business model of their generation. This business model, known as the franchise, allows the franchisor to minimize its costs while still providing much needed expansion. Those costs are usually shifted onto the franchisee who gets to do business in the name of the franchisor. In exchange, the franchisee generally does not need any superior business talent or entrepreneurial skill. They need the initial financial investment to pay a franchisee fee if any, funds to open up a store, and people to staff that store. The franchisee then follows the franchisor’s business model. In a dull way the franchisee gets to be his own boss. Frankly, a lot of consumers invest in franchises. They take on almost 36 CONSUMER BANKRUPTCY JOURNAL This American Dream of being you own boss when in a franchise relationship is severely altered by the franchise agreements and the laws that affect these relationships. Moreover, if the franchisee’s financial prospects change such that he has to contemplate bankruptcy (whether or not it is triggered by the franchise) he can lose his franchise and may not know that. Indeed, the bankruptcy attorney may not know this either. On the other hand, if contemplating bankruptcy is triggered by the franchise relationship a great analysis instead of bankruptcy is whether or not there is a cause of action available to the franchisee which would sooth the debt. The Franchise Agreements And The Automatic Stay Franchise agreements are n ɵ)ѥ)͕ٕɅɅ̸)QɅ͕)䁡ٔѕɕɕ)ݥѠѡՅɅͽȁ͕!)䁡ٔѕɕѡȁ)ɕ́ݥѠ͕Ʌєѥѥ́)ѥѼѥѡɕ)ݥѠѡɅͽȸQɕ)ѕٔЁЁ)͔ȁӊéȁͥѕȁѡմ)$$$()͕ѥ͔䁱ѥѥ)ٽɅѼѡɅͽȸ)Q)Ʌ͕䁹Ёٕٔɕ)хЁݥѠѡɅͽȁ)ٔѼѡɽ՝)ٕѡɽٕѽѼѥ)ȁѡɽՍЁȁ͕٥Ё̸͕)Q͔ͥ́ɕѥ́͡ͽչ)) Ёѡ䁅ɔи)Q)٥́Ё́Ѽх͠)ɍեѽ́ɥѠɕٕѥ)ѡѼѡɅͽȸ%ѡ)Ʌͽȁȁ́)䁽ѡɅ͔ɕ)ȁɕ͕́Ѽɕ܁ѡѡЁ)ٔ)مхѥ)͕Օ)Ѽ)ѡ)Ʌ͕))ٕ䁽٥́ͽѥѼѥ)ȁɕ݅́Ѽȁэ)ѼЁѡɽѕѥѡѽѥ)х)MāTL ȸ) )ٕѡձȁɔɅ͔)ɕ́ѡȁɽ٥ͥ́ѡ) э ɔɥɕq%)́Ʌ䁅ѕѡ)Ʌ͔ɕ́ѡЁٔ)ѕɵѕ́Ё)͔ɔᕍѽ䁍Ʌ́չ)ѡ э t%IMѕ)Q%؁H԰܀)5ऀѕɹхѥѕ)Uȃ ԡѡѕ)յȁͥᕍѽ)ɅЁȁչɕ͔ݡѡ)ȁЁѡɅЁȁ͔ɕɥ)ѡЁ܁͕́)ѼѡɅЀѡȁѡѡ)ѽȤɽѥəɵ)ɽȁɕɥəɵѼ)ѥ䁽ѡȁѡѡѽȰ(Ս䁑́Ё͕)Ѽѡյѥȁͥи()9ѥͽѥ յȁ эѽɹ((0